Q: Our church is considering an employee service awards program for rewarding employees who have worked a specified number of years for our church. A member of our governing board has asked if these awards would be taxable income to the employees?
Qualified employee achievement awards are not taxable to the employee.
Defining a qualified employee achievement award
A qualified award:
(1) Is tangible personal property (not cash, gift certificates, or securities);
(2) Is given to an employee for length of service or safety achievement;
(3) Comes with a meaningful ceremony, and under circumstances that do not indicate that it is disguised compensation; and
(4) The amount that is not taxable is limited to the employer’s cost and cannot be more than $1,600 ($400 for awards that are not Qualified plan awards) for all such awards received by an employee during the year.
A Qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. (Check the tax code for what is a highly compensated employee in a given year as the number can change.)
An award is not a Qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be Qualified plan awards except for this limit) is more than $400. To fi gure this average cost, ignore awards of nominal value.
The exclusion for employee achievement awards does not apply to the following awards:
- A length−of−service award given to an employee for less than five years of service or if the employee received another length−of−service award during the year or the previous four years.
- A safety achievement award given to an employee who is a manager, administrator, clerical employee, or other professional employee or if more than 10 percent of eligible employees previously received safety achievement awards during the year.
